Operation Choke Point: Could Lawsuit Ensnare the NCUA?

As payday lenders sue banking regulators over Operation Choke Point, one plaintiff said other regulators like the NCUA could potentially be targeted.

“We have named the FDIC, OCC, the Fed, and Thomas Curry as defendants in this litigation because we believe that their backroom pressure and guidance on reputational risk has played the central role in causing banks to terminate long-standing, mutually beneficial relationships with lawful, responsible businesses,” wrote Amy Cantu, communications director for the CFSAA in an email response to a question about whether the litigation could eventually involve NCUA. “Over time, we may find it necessary to add other agencies as defendants,” she added.

The Community Financial Services Association of America and Advance America brought suit June 5 in the U.S. District Court for the District of Columbia charged the regulators abused their authority by launching, with the support of the Justice Department, Operation Choke Point, an effort the payday lenders said was aimed at forcing banks to sever their working relationships with them.

The NCUA said it was not involved in Operation Choke Point.

NCUA Public Affairs Specialist John Fairbanks also said he doubted whether NCUA had ever directed a credit union to sever ties with a payday lender, but said he would continue researching the question.

The suit charged the regulators with expanding their authority as safety and soundness regulators beyond reasonable grounds in their effort to eliminate payday lenders by telling banks their relationships with payday lending firms carried unacceptable reputation risk.

“The ostensible basis of Defendants’ campaign against the payday lending industry (and other lawful but disfavored industries) is that providing financial services to such industries exposes the banks to ‘reputation risk,’” the complaint alleged. “According to informal ‘guidance documents’ provided to the regulated institutions, ‘reputation risk’ arises from ‘negative public opinion’ about the bank’s customer, and ‘any negative publicity involving the [bank’s customer] … could result in reputation risk.’”

The guidance document cited in this paragraph of the complaint was a Financial Institution Letter from June 2008 titled “Guidance for Managing Third Party Risk.”

CFSAA and Advance America complained that the regulators have not provided any objective criteria for how much negative public opinion was enough to justify the reputation risk and that the broad term reputation risk did not distinguish between lawful, licensed business and criminal organizations engaged in outright fraud.

They also charged that the regulators engaged in “a variety of backroom pressure tactics” to get banks to sever their ties with payday lending firms. These have allegedly included “warning them that continuing their relationships with payday lenders will result in harsh and prolonged examinations, reduced examination ratings, and/or other punitive measures,” according to the complaint.

The threats were necessary, the complaint alleged, because the regulators wanted to avoid the normal procedures required by the Administrative Procedures Act for promulgating regulations in public.

“The Defendant agencies’ campaign against the payday lending industry has thus been carefully designed and waged to avoid the public and judicial accountability inherent in the Administrative Procedure Act’s requirement that federal regulatory agencies follow notice and comment rule-making procedures before imposing binding legal norms on regulated entities,” they charged in their complaint.

The suit alleged the threats have worked and claimed 80 banks have broken off their business relationships with Advance America and other payday lending firms.

“It is unfortunate that we now must resort to litigation to protect legal, regulated businesses from this improper federal regulatory overreach. We have attempted to bring our concerns regarding Operation Choke Point to the attention of federal officials and Congress,” said Dennis Shaul, CEO of CFSA in a statement the association posted on its website. “Despite this vigorous effort to inform regulators of the harmful effect of Operation Choke Point, this abuse of regulatory authority continues, and many legal businesses, including nonbank lenders who are members of CFSA, are losing their basic banking services, such as bank accounts and lines of credit.”